FTC Targets Reporting of Licensing of Pharmaceutical Patents With Special Rules for Premerger Notification: What You Need to Know

On November 15, 2013, the Federal Trade Commission (“FTC”) adopted special rules for determining whether “exclusive” licenses of pharmaceutical patents are required to be reported to the FTC and the Antitrust Division of the Department of Justice under the Hart-Scott-Rodino Premerger Notification requirements as asset transfers/acquisitions. See 78 Fed. Reg. 68705, et seq. While exclusive licenses of any patent regardless of industry have always been subject to reporting under the Premerger Notification rules as asset transfers/acquisitions, assuming they met the monetary thresholds for reporting, the FTC, adopted new rules specifically targeting exclusive licenses of patents of pharmaceutical companies.

Under the new rules, the FTC will use a new test that requires reporting of patent licenses that involve transfer of “all commercially significant rights.” That term is defined as:

“... the exclusive rights to a patent that allows only the recipient of the exclusive license to use the patent in a particular therapeutic area (or specific indication within a therapeutic area.)”

15 CFR §801.1(o). This rule replaces the traditional “make, use and sell” (to the exclusion of all others, including the licensor) test that previously determined when transfer/acquisition of an exclusive license was reportable (if the monetary thresholds were met). Under the new rule, if the licensor retains “limited manufacturing rights”[1] or “co-rights”,[2] to the patents, the license will be deemed a license which needs to be reported, even though it would not technically be an exclusive license.

The rule only applies to companies whose manufacture and sale would generate revenues in NAICS Industry Group 3254, including:

325411 Medical and Botanical Manufacturing

325412 Pharmaceutical Preparation Manufacturing

325413 In-Vitro Diagnostic Substance Manufacturing

325414 Biological Product (except Diagnostic) Manufacturing

See 15 CFR § 801.2(g). For these purposes, licenses in these industries of “all commercially significant rights” in a patent(s) would be asset transfers/acquisitions for purposes of Premerger Notification.

The pharmaceutical industry, through the Pharmaceutical Research and Manufacturers of America (PhRMA), commented on the proposed rules (77 Fed. Reg. 50057, August 2012), questioning the legality of limiting the rule to one industry and the necessity of the rule. The FTC in promulgating the final rule, responded that:

The Commission is limiting the rule to the pharmaceutical industry because, as stated in the NPRM, this is where the need for clarification arises and where the Commission has experience with the relevant transactions. For the five-year period ending December 31, 2012, the PNO received filings for 66 transactions involving exclusive patent licenses, and all were for pharmaceutical patents. The PNO has not found other industries that rely on these types of arrangements. Although it is possible for other industries to engage in the kind of exclusive licensing that typifies the pharmaceutical industry, the PNO has not processed filings related to these kinds of exclusive licenses in any other industry in the past five years. In addition, requests for guidance on the treatment of exclusive patent licensing transactions have generally been limited to the pharmaceutical industry. Accordingly, the Commission has not found a need for a rule applicable to other industries.

78 Fed. Reg. 68,708.

In response, PhRMA filed suit in the United States District Court for the District of Columbia. (Civ. 1:13-cv-019 74-BAH). PhRMA’s position is that Congress “knowingly and intentionally withheld from the Commission the authority to promulgate rules targeting specific industries” and that the action is unauthorized agency action. That case is in the process of briefing on Motions for Summary Judgment filed by PhRMA and the FTC. A decision should issue this Spring. If the rules are upheld, pharmaceutical and related companies will be required to submit to the Premerger Notification Office more types of “exclusive” patent licenses than previously required.

[1] See 15 CFR §801(1(p) which provides that:(p) Limited manufacturing rights. For purposes of paragraph (o) of this section and paragraph (g) of § 801.2, the term limited manufacturing rights means the rights retained by a patent holder to manufacture the product(s) covered by a patent when all other exclusive rights to the patent within a therapeutic area (or specific indication within a therapeutic area) have been transferred to the recipient of the patent rights. The retained right to manufacture is limited in that it is retained by the patent holder solely to provide the recipient of the patent rights with product(s) covered by the patent (which either the patent holder alone or both the patent holder and the recipient may manufacture).

[2] See 15 CFR § 801.1(q) which provides that:

Co-rights. For purposes of paragraph (o) of this section and paragraph (g) of § 801.2, the term co-rights means shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent. These co-rights include, but are not limited to, co-development, co-promotion, co-marketing and co-commercialization.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.